CHAPTER Why Study Money, Banking, and Financial Markets? 2008, and then fell again by almost 50% by early 2009 These considerable fluctuations in stock prices affect the size of people s wealth and, as a result, may affect their willingness to spend The stock market is also an important factor in business investment decisions because the price of shares affects the amount of funds that can be raised by selling newly issued stock to finance investment spending A higher price for a firm s shares allows the firm to raise a larger amount of funds that can be used to buy production facilities and equipment In Chapter we examine the role that the stock market plays in the financial system, and we return to the issue of how stock prices behave and respond to information in the marketplace in Chapter WH Y STU DY F IN AN CI AL I N STI T UT I ON S AN D BAN KIN G ? Part III of this book focuses on financial institutions and the business of banking Banks and other financial institutions are what make financial markets work Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities Thus they play a crucial role in the economy Structure of the Financial System The financial system is complex, comprising many different types of private sector financial institutions, including banks, insurance companies, mutual funds, finance companies, and investment banks, all of which are heavily regulated by the government If an individual wanted to make a loan to Bombardier or Nortel, for example, they would not go directly to the president of the company and offer a loan Instead, they would lend to such companies indirectly through financial intermediaries, institutions that borrow funds from people who have saved and in turn make loans to others Why are financial intermediaries so crucial to well-functioning financial markets? Why they extend credit to one party but not to another? Why they usually write complicated legal documents when they extend loans? Why are they the most heavily regulated businesses in the economy? We answer these questions in Chapter by developing a coherent framework for analyzing financial structure in Canada and in the rest of the world Financial Crises At times, the financial system seizes up and produces financial crises, major disruptions in financial markets that are characterized by sharp declines in asset prices and failures of many financial and nonfinancial firms Financial crises have been a feature of capitalist economies for hundreds of years and are typically followed by the worst business-cycle downturns Starting in August of 2007, the United States economy was hit by the worst financial disruption since the Great Depression when defaults in subprime residential mortgages led to major losses in financial institutions, producing not only numerous bank failures, but also the demise of Bear Stearns, the largest investment bank in the United States Chapter discusses why these crises occur and how they can so much damage to the economy Banks are financial institutions that accept deposits and make loans Included Banks and Other Financial under the term banks are firms such as chartered banks, trust and mortgage loan companies, and credit unions and caisses populaires Banks are the financial interInstitutions